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Woody asked in Business & FinanceInvesting · 1 decade ago

Hey together! What does the word "leg" mean in financial context? (default leg, coupon leg...) Thanks!

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  • 1 decade ago
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    The word "leg" is usually used as a noun to specify one position in a multiposition spread or swap.

    For example, one spread I opened some months ago was:

    Bought 50 HOV Feb $7.50 puts @ $1.45

    Sold 150 HOV Feb $5.00 puts @ $0.65

    http://messages.yahoo.com/Business_%26_Finance/Inv...

    This spread had two legs. One leg was the 50 HOV Feb $7.50 puts I bought. The other leg was the 150 HOV Feb $5.00 puts I sold.

    Other types of spread may have more legs. A butterfly spread normally has three legs unless it is an iron butterfly, in which case it has four legs.

    The word "leg" is also sometimes used as a verb, meaning to trade one position of a spread separately from the other position(s) in the spread.

    For example, in the example I gave I used a single trade order (called a spread order) to buy one leg and sell the other leg in a single transaction. If I had first bought one leg and later sold the other leg I would have "legged into the spread" since I traded one leg at a time.

    I'm afraid I don't understand swaps well enough to explain a "coupon leg" to you, but from the "VALUATION OF AN ASSET SWAP" at

    http://www.pascalroussel.net/valuation_of_swaps.ht...

    it is clear they are using the word "leg" the same way talking about bond coupons.

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